Illustration: Luo Xuan/GT
The trade war between China and the US has escalated again after the US government announced additional 10 percent tariffs on another $200 billion worth of Chinese goods, followed by China’s retaliatory tariff increases on $60 billion worth of US imports. Most observers believe the dispute will deepen if neither side makes any concessions.
After the announcement of the new US tariffs, US Commerce Secretary Wilbur Ross said that the move is aimed at modifying China’s behavior, and he added that China is “out of bullets” to retaliate against the US. He also added that the trade war is only driving up inflation slightly.
Meanwhile, investors generally reacted to the escalation positively, believing that its impact on global economic growth will be limited.
Looking at the capital markets’ responses, the situations in China and the US seem so different. But in terms of market size, the gap between the two largest economies in the world is not that big. It is necessary for China to rethink the value of its market, with a careful assessment needed to give full play to its market scope and scale. That’s the right way to cope with the trade war. Various figures can be used to compare the economic size and market scope of China and the US.
First, in terms of economic scale, US GDP reached $19.39 trillion in 2017, while China’s GDP was about $12.72 trillion, equivalent to 65.6 percent of the US economy.
Second, WTO data showed that China is the biggest merchandise trader at $4.1 trillion. Meanwhile, US trade value was about $3.96 trillion and second only to China.
Third, when it comes to commercial services trade, the US leads China. The US figures for services imports and exports both led the world in 2017, while China recorded deficits in services trade in 2016 and 2017.
The US is the largest source of foreign technology for China, with nearly one-third of China’s technology imports coming from the US. Except for a few years, China’s technology imports from the US have grown at a double-digit rate.
Fourth, figures from Japan’s Mizuho Securities showed that US retail sales totaled $3.3 trillion in 2000, while consumers only spent $472 billion in China. But this year, China’s retail sales are expected to approach those of the US, with the figure forecast to reach $5.8 trillion. In some important merchandise categories, sales in China have already exceeded those in the US. For instance, in 2016, US vehicle sales reached 17.6 million, far less than the 24 million sold in China.
Fifth, the two countries differ greatly in terms of population size. In 2017, the US population was 325.7 million, while China’s reached 1.39 billion. Such a large population represents a sufficient labor supply and a huge potential for consumption upgrading.
Overall, both markets are very big, so the full utilization of the market scope is extremely important. In our opinion, the size and potential value of China’s market aren’t lagging too far from those of the US. The essence of the trade war is a battle about market space. Those who can make good use of the market space will prevail, while those who can’t may have to respond passively in the future.
In this sense, whether China is able to properly use its market space will be crucial for the trade war. To give full play to the value of the nation’s market space, Chinese policymakers need to transform their thinking from production-oriented to consumption-oriented. If they don’t, even if China’s economy becomes the largest in the world, it would still end up in a passive position.